Venture capital and methods of payment in mergers and acquisitions

Abstract

We find evidence that venture capital (VC)-backed targets receive more stock as the method of payment in mergers and acquisitions than non-VC-backed targets do, even after controlling for self-selection bias, differences of characteristics between transactions of VC-backed and non-VC-backed targets and VC information bridge-building. VC-backed targets prefer stock of acquirers that are small, young, risky or invest intensively. In addition, we document that the ratio of stock is larger when the targets are financed by reputable VCs, a syndicate of VCs or VCs with low fund maturity. Overall, our findings suggest that VCs strategically hold shares of the acquirers that meet their investment preferences.